The Economist contemplates three advantages that could result from getting rid of cash in favor of electronic payments only ("with credit cards, mobile phones, and even watches"). It also mentions loss of privacy as a disadvantage.

According to this one possible advantage is as follows:

Getting rid of cash could boost the economy. Below-zero interest rates could encourage investment and might help to support the recovery. But when physical cash is around, negative interest rates are impossible: savers simply withdraw their savings. Get rid of physical money and the problem goes away, no one can avoid negative rates.

Are there any serious studies (e.g. books) that discuss possible effects of below-zero interest rates in more details? E.g., how would this tool differ from inflation, which currently seems to serve a similar purpose (and has similar effects in that is makes cash savings diminish in value)?

UPDATE I've meanwhile found some sources (still interested in more recommendations) here. There is also a fun proposal (thought experiment) for implementing negative interest rates even on physical money :)

It has been proposed that a negative interest rate can in principle be levied on existing paper currency via a serial number lottery: choosing a random number 0 to 9 and declaring that bills whose serial number end in that digit are worthless would yield a negative 10% interest rate, for instance (choosing the last two digits would allow a negative 1% interest rate, and so forth).

The new source also indicates that negative interest rates and (mild) inflation are indeed similar, but the second is (or was) simpler for governments to achieve (said John Maynard Keynes, no less): so simplicity of implementation is perhaps a part of the answer to my question.

  • 1
    Seems to be a great advantage for politicians, who can far more easily control other people's money. Doesn't seem to be much advantage for the people who earnt it. Sep 23, 2014 at 9:13
  • @user1450877 But how do below-zero interest rates differ from inflation (also) in that regard?
    – Drux
    Sep 23, 2014 at 9:15
  • I don't really understand the question. Negative interest rates would decrease the money supply, which would generally lead to deflation. Inflation is the effect an increased money supply has on prices. Sep 23, 2014 at 9:19
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    @user1450877 well look at it from the point of view of a saver: seems to me that if you have 100K in the bank and the interest rate is -10% (with inflation at 0%) it will diminish to 90K. If there is 10% inflation (with interest rates near to 0%) instead it will also diminish in effect to 90K. But anyway, if there is a source that makes it credible to me that negative interest rates would lead to deflation (not an equivalent of inflation) this could be a good answer to the question.
    – Drux
    Sep 23, 2014 at 9:30
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    The term for that is "Money supply side deflation". I'm not so sure about the premise that people would just take everything out in cash - the ECB currently has negative interest rates so in the next few months it should become apparent whether that is true (Yes it's only banks that are directly affected but if they ease lending restrictions, invest on their own or whatever that would count too IMO)
    – user45891
    Sep 23, 2014 at 19:34

1 Answer 1


The video is dead now, so I don't know exactly what The Economist was talking about beyond what you quoted. But contra to what that says, the ECB has had a negative interest rate for quite a while. So did the Swiss central bank. And banks still kept their money there...


a recent IMF staff study shows how central banks can set up a system that would make deeply negative interest rates a feasible option.

In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.

When cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.

Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.

One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries. To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.

Given that some Nordic countries seem to going cashless, this isn't so outlandish.

And to finally answer your question as to how that ([deep] negative rates) compares to raising the inflation target (from actual IMF study):

In our view, the dual local currency system should be considered alongside alternative proposals for keeping monetary policy effective at low interest rates, such as a higher inflation target proposed by Blanchard et al. (2010), or Quantitative Easing (QE). All current proposals, including the status quo, have pros and cons. In comparison to alternatives, the dual local currency system has the advantage of completely freeing monetary policy from a lower bound, allowing for effectively redressing and hence shortening the duration of recessions. Raising the inflation target and QE do not remove the lower bound but would shift it downward by some percentage points (Ball et al. 2016).

So supposedly no more ZLB at all if you negative-interest cash. However, from the Ball source, the negative rate practiced by some central banks didn't transmit well to the rest of the banking system:

The transmission of rate cuts to bank interest rates has been sluggish, as a resistance of bank deposit rates to go below zero has been evident. This resistance is not universal. Indeed, banks are charging negative rates to some corporate and institutional investor deposits in some countries (Shin, 2016). Average deposit rates for non-financial firms in Denmark, for example, are slightly negative, and bank deposit rates for pension and insurance funds have turned more negative (Danmarks Nationalbank 2016). In Switzerland, large time deposit rates have turned negative.

However, there is little evidence so far that banks are passing negative interest rates through to their retail depositors Insured retail deposits are an attractive source of financing for a bank in normal times, and a retail customer can often be cross-sold many other value-added banking products. Banks are reluctant to lose market share for insured deposits, which they may not easily regain when interest rates turn positive. Moving to a negative interest rate could be a salient event that would cause retail customers to ‘shop around’. Given the inertia normally characterising retail bank relationships, the bank that makes the first move into negative deposit rates for retail customers could experience a hard-to reverse loss of market share. Besides, charging interest on retail deposits would be likely to have a negative impact on the wider public image of banks that begin to do so. Moreover, banks may fear that retail customers are more likely to switch from deposits to cash as the interest rate on deposits falls below the zero rate on cash.


The recent cuts below zero were small, and one would not have expected a great boost from such timid policy rate cuts if they had happened in positive territory. The cuts have also been small in comparison to the drops in inflation expectations that they were responding to, and the associated net drops in real rates have therefore tended to be even smaller that the nominal rate cuts.21 All in all, it would be better to describe the interest rate measures of the past couple of years as having prevented a tightening of monetary conditions and a stronger slowdown, rather than having represented an actual loosening or an active boost to demand.

So, we need bigger (in absolute terms) negative rates. Or so these guys propose. Of course there's the damn cash problem.

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